This article is most relevant to Labuan foundations, founders, beneficiaries, officers, and secretaries of any Labuan foundations involved in the governance and compliance of Labuan foundations.
Introduction to the Labuan Foundation (Amendment) Bill 2024
In December 2024, the Dewan Negara passed several bills under the Ministry of Finance, one of which is the Labuan Foundation (Amendment) Bill 2024 (“LFB Amendment 2024”). Although still at the Bill stage and awaiting royal assent, the amendments propose significant changes that could materially affect the way Labuan foundations operate, particularly with regard to governance and compliance.
What is a Labuan Foundation
A Labuan foundation is a corporate body similar to a company, with a distinct legal entity. It is typically established to hold and manage assets for the benefit of its beneficiaries. Labuan foundations are often used for private wealth management or charitable purposes. Unlike companies, Labuan foundations do not have shareholders. Instead, they are managed by officers and operate under a charter and articles of association.
Introduction of Beneficial Ownership Concept
Consistent with recent changes to the Labuan Companies Act 1990 under the Labuan Companies (Amendment) Act 2022, and in line with CCM’s mandatory beneficial ownership (BO) reporting requirements for Malaysian private companies, the concept of beneficial ownership is now also being introduced for Labuan foundations.
A “beneficial owner” (i.e. BO) is defined as a natural person who:
- benefits, directly or indirectly, of the funds or assets endowed by any of the objects of the foundation in accordance with its charter;
- the council may exercise discretion under the foundation in accordance with its charter and who has been identified as presenting higher risk; or
- who has the right to exercise, or actually exercises, effective control and influence over the activities, including the right to direct or influence the running of the activities of the foundation, such as the right to:
- appoint or remove any of the council member, officer, secretary, supervisory person or beneficiary;
- direct the distribution of funds or assets;
- direct investment decisions of the foundation;
- direct how the objects of the foundation are to be carried out;
- amend the charter of the foundation; or
- dissolve the foundation.
Key Implications of the Proposed Legislative Amendment
- Identifying Beneficial Owners
A Labuan foundation will now be required to take reasonable steps to identify and verify its beneficial owners. This includes issuing notices to founders, council members, officers, and beneficiaries to confirm the identity of any person who may be a beneficial owner. This process involves requesting them to:
- confirm their status as a beneficial owner or if they know anyone who is.
- provide necessary details about the BO.
- Voluntary Disclosure by Beneficial Owners
All beneficial owners must immediately notify the foundation upon becoming a BO and update any changes to their information. Failure to do so could result in a fine of up to RM50,000.
- Record Maintenance
Once beneficial owners are identified, the foundation must (i) maintain a register of beneficial owners, and (ii) notify the Labuan Financial Services Authority (LFSA) with the BO’s details.
The secretary of the foundation is responsible for ensuring compliance with these record-keeping obligations. Non-compliance with these maintenance requirements could lead to a fine of up to RM50,000. Additionally, penalties for providing false or misleading information could be severe, with fines up to RM1,000,000 and/or imprisonment of up to 3 years.
- Information Disclosure and Confidentiality
While the beneficial owner details will be submitted to the LFSA, such information will be kept confidential. Only the BO (or their nominee) and the LFSA will have access to these details. This ensures privacy while ensuring regulatory oversight.
What information will be required?
While there have yet to be clear guidance on the type of BO’s details to be disclosed to the LFSA, it is likely that the following information would have to be collected:
- full name of the BO;
- the BO’s identification number or passport;
- residential address;
- date of birth;
- nationality or country of origin;
- percentage of ownership or interest;
- nature of BO’s control over the foundation; and
- date on which it becomes or ceased to be a beneficial ownership
Summary
The LFB Amendment 2024 imposes new compliance requirements on Labuan foundations, particularly regarding the identification and disclosure of beneficial owners. As a pre-emptive measure, foundations should take immediate steps to review governance and ensure timely and accurate record-keeping to avoid penalties for non-compliance.
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This article was written by Jocelyn (Associate) from Donovan & Ho’s corporate practice.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.
